Firm B, a calendar year, cash basis taxpayer, leases lawn and garden equipment. During December, it...

Firm B, a calendar year, cash basis taxpayer, leases lawn and garden equipment. During December, it received the following cash payments. To what extent does each payment represent current taxable income to Firm B?

$988 repayment of a loan from an employee. Firm B loaned $950 to the employee six months ago, and the employee repaid the loan with interest.
$1,050 deposit from a customer who rented mechanical equipment. Firm B must return the entire deposit when the customer returns the undamaged equipment.
$10,900 short-term loan from a local bank. Firm B gave the bank a written note to repay the loan in one year at 4 percent interest.
$1,258 prepaid rent from the customer described in part b. The rent is $17 per day for the 74-day period from December 17 through February 28.

Expert Solution

In cash basis of taxation the income of an individual is taxable as and when the amount is actually received even though the amount is not earned like in accrual basis of taxation.

In the given question

A.repayment of loan by an employee

The loan returned is not an income but the interest amount paid in excess of the loan amount is the income earned.

The amount of $38 is taxable income.

B.acceptance of deposit from customer

The amount accepted as a deposit which should be repaid after a period of time is not an income.

No income is earned here.

C.loan from bank

Loan is not an income but it is a liability to be repaid.

No income is earned here.

D.prepaid rent accepted

In cash basis the rent is treated as an income in the year in which it is actually received even though it is for the future years unlike in accrual basis of accounting where it is recognized only in the year for which it actually belongs to.

Total amount of $1258 is to be treated as income.

ekkarill92 answered 1 month ago

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Firm B, a calendar year, cash basis taxpayer, leases lawn and garden equipment. During December, it...

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